This is the fifth in a continuing series of articles from Ron’s newest book, Getting to Yes with Your Banker, which includes 93 secrets you likely didn’t know about dealing with your banker. Presented in a Click and Clack format, from an entrepreneur’s and a lender’s perspective, the book is co-authored by Ron Sturgeon, a serial entrepreneur, and Greg Morse, founder and president of Worthington National Bank, a community bank with 4 locations throughout Tarrant County.
The book is packed with tips and advice about how to choose and get along with a banker, what your banker wants to see, and other valuable tips for both start ups and existing businesses. In the previous article, we covered the right way to start a banking relationship and why you should not work with a “relationship banker.” In this article, we’ll cover the kind of experience the right banker has and what you need to know about loan-to-deposit ratios.
Courting a Banker with the Right Experience
Ron: What about experience? What kind of banking experience should they have?
Greg: They should have been a banker for at least five years. But you don’t want them to have too much experience, either. If you’re planning for the quarter century, not the quarter, you need a banker who’s going to be around for a while. You don’t want someone who’s too young and green, and you don’t want someone who’s about to retire.
Loan to Deposit Ratios
Ron: You also definitely want to understand the bank’s loan-to-deposit ratio. Say a bank has $20 million to loan, and it’s only loaned out $10 million. That means it has a 50 percent loan-to-deposit ratio. Banks don’t make money by not loaning out their money. So then they loan the other half to the Federal Reserve or to someone else at a low rate. But they sometimes only make below one percent at the Federal Reserve.
Ron: On the other hand, if a bank has $100 million to loan, but it has loaned out $110 million, it has too many loans for its deposit base. A bank with a loan-to-deposit ratio of less than about 70 to 75 percent probably wants to make more loans. But after 90 percent, it probably doesn’t. So, as a banker, what would you say is the loan-to-deposit ratio potential customers should look for? All banks have a legal loan limit; it’s the most they can lend any one client. If your loan is big, ASK about the bank’s loan limit.
Ron: There is no reason to discuss a loan that is too big for the lender. Also, since bankers are greedy (aren’t most of us?), they often will consider a loan larger than their limit. They accommodate this kind of loan by selling off part of it to another bank. Such an arrangement is called a participation. You should really try to avoid being part of such a deal because then you have another lender looking at your stuff, making requests. The original bank will manage the relationship, and wants you to believe it doesn’t matter, but don’t kid yourself. The first bank will have to field requests from the other lender about your relationship and that means you will have more oversight and paperwork.
Greg: I would say that a good sweet spot is between a 70 and a 90 percent loan-to-value ratio. This way, you know they’re in the lending business, but they aren’t loaned out. Once you find a bank with a ratio over 70 percent, you know they’re in the business of lending money.
In the next article, we will explore ways to expand your banking relationships.
Ron Sturgeon, business owner, consultant and peer bench marketing leader, combines over 35 years of entrepreneurship with an extensive resume in consulting, speaking and business writing. Ron can be reached at 5940 Eden, Haltom City, TX 76117, 817-834-3625 or by email at rons@MrMissonPossible.com.